Unlocking CAN SLIM: A Proven Investment Approach

The CAN SLIM investment approach is a powerful tool for identifying top-performing stocks. This approach was developed by William O'Neil, the founder of Investor's Business Daily.

CAN SLIM stands for Current Quarterly Earnings, Annual Earnings Growth, New Products or Services, Supply and Demand, Institutional Sponsorship, and Market Direction. These six key factors help investors make informed decisions.

By focusing on these key factors, investors can increase their chances of success in the stock market. The CAN SLIM approach is not about making quick profits, but about investing in companies with strong fundamentals.

Investors who use the CAN SLIM approach can expect to see significant returns on their investments. In fact, a study found that CAN SLIM stocks outperformed the S&P 500 by a wide margin over a 10-year period.

Suggestion: Penny Stock Investors

The CAN SLIM method is a powerful investment strategy created by William O'Neil that helps investors find stocks with strong growth potential. It combines fundamental and technical analysis to spot companies with big price potential.

The CAN SLIM method is explained in detail in O'Neil's book, How to Make Money in Stocks. It's a strategy that's been developed over time, and it's based on six key components.

Here are the six key components of the CAN SLIM method:

Each component of the CAN SLIM method provides valuable insights into a company's growth potential, and by combining them, investors can make informed decisions about which stocks to buy and hold.

In the CAN SLIM investment process, earnings growth is a key factor. O'Neil looked for companies with quarterly earnings growth of at least 25% compared to the same quarter of the previous year.

Strong earnings growth is a sign of a healthy and growing company. This is especially true when the growth rate is accelerating.

The "C" in CAN SLIM emphasizes the importance of current earnings per share (EPS) growth rate.

Companies with robust sales growth tend to outperform the market.

Worth a look: Slim Jim Tool

Annual Earnings Increases are a key component of the CAN SLIM system. O'Neil looks for companies with a steady and significant record of annual earnings growth, with increasing earnings per share in each of the last five years.

To qualify, earnings per share from continuing operations must be higher for each year compared to the previous year. Additionally, earnings over the last 12 months must be greater than or equal to earnings from the latest fiscal year.

A catalyst is also essential for a stock to start a strong price advance. O'Neil found that 95% of winning stocks had some sort of fundamental spark, such as a new product or service, new management, or a structural change in the company's industry.

Discover more: Market Price per Share

Deepvue makes scanning for CAN SLIM stocks super simple by instantly filtering for companies that meet key criteria like strong annual earnings growth and revenue growth.

In just a few clicks, Deepvue delivers a curated list of high-potential stocks, making your search for winners faster and more efficient.

O'Neil emphasizes the importance of pursuing stocks showing strong upward price movements, where stocks that seem too high-priced and risky most often go even higher.

Stocks that are making the new high list while accompanied by a big increase in volume might be prospects worth checking.

A stock making a new high after undergoing a period of price correction and consolidation is especially interesting, according to O'Neil.

In his study of winning stocks, O'Neil found that 95% of the winning stocks had some sort of fundamental spark to push the company ahead, such as a new product or service, a new management team, or a structural change in a company's industry.

Recommended read: The Dhandho Investor the Low-risk Value Method to High Returns

Annual earnings growth is a crucial component of the CANSLIM system, and it's essential to look for meaningful growth. O'Neil looked for companies with a minimum annual earnings growth rate of 25% in recent years.

To qualify, a company's earnings per share must be higher for each of the last five years compared to the previous year. This means a steady and significant record of annual earnings is required.

A company's earnings over the last 12 months must also be greater than or equal to earnings from the latest fiscal year. This helps guard against any recent reversal in trend.

In fact, O'Neil's study found that winning stocks had a steady and significant record of annual earnings in addition to a strong record of current earnings.

Recommended read: S B I Card Share Price

Market direction is the most important factor in the stock market, affecting every stock regardless of its strength. Even the best stocks will sink in a bear market.

Three out of four stocks follow the trend of the general market, making it crucial to stay aligned with the broader market trend to succeed. Market direction serves as a guide for when to enter and exit positions, with O'Neil famously saying, "The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you're wrong."

To identify key turning points, look for a Follow-Through Day (FTD), which typically happens four to seven days after the market hits a low, marked by a significant gain in one of the major indexes on high volume. This signals that big investors are coming back into the market, potentially starting a new bull phase.

It's essential to avoid going against the market trend, as trying to bet against it usually doesn't end well. Even fundamentally strong stocks will decline in a bear market, making it better to wait until the market trend turns positive again.

Market direction is the foundation of the stock market, and it's essential to understand its influence on individual stocks. Three out of four stocks follow the trend of the general market.

Market direction serves as a guide for when to enter and exit positions. In a bull market, you should be more aggressive and ride the overall upward trend. In a bear market, you want to reduce your exposure, protect your money, and wait for better conditions.

The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you're wrong. This means protecting your capital during downturns is just as important as making gains during uptrends.

To identify key turning points, look for the Follow-Through Day (FTD), which typically happens four to seven days after the market hits a low. An FTD is marked by a significant gain in one of the major indexes on high volume, signaling that big investors are coming back into the market.

Market direction has a powerful influence on individual stocks, so trying to bet against it usually doesn’t end well. Even fundamentally strong stocks will decline in a bear market. Rather than holding or buying stocks that seem undervalued in a down market, it’s better to wait until the market trend turns positive again.

At least 50% of the whole game is the general market, according to O’Neil’s research. This emphasizes the importance of aligning your investments with the prevailing market direction.

Here are some key signs to look out for at a market top:

The market can be slow to acknowledge the downtrend, so it's essential to act quickly when you spot these signs. O’Neil recommends putting 25% of your portfolio into cash when the market peaks and begins a major reversal.

To determine if a company's quarterly earnings are strong enough, you'll want to look for a minimum increase of 18% to 20% over the same quarterly period one year ago. This is a key indicator of a company's growth potential.

Comparing similar quarters is essential, as many firms have seasonal earnings patterns. This means you should compare this year's second quarter to last year's second quarter, for example.

A change in sign, such as a negative to a positive, requires special consideration and may result in misleading screening results. Be sure to check the figures for unusually small base numbers that may distort the percentage change figures.

To ensure proper screening results, O'Neil recommends including a secondary or qualifying criterion. In the CAN SLIM screen, positive earnings for the current quarter are required to make the results of the growth rate calculation more meaningful.

Excluding nonrecurring items from the analysis is crucial, as one-time events can distort the actual trend in earnings. With the CAN SLIM screen, we examine growth in earnings from continuing operations only.

For more insights, see: Class S Shares

Institutional sponsorship is a crucial factor to consider when evaluating stocks. O'Neil suggests that a stock needs a few institutional sponsors to show above-market performance.

Having at least three to ten institutional owners is a reasonable minimum number to look for. This number refers specifically to actual institutional owners, not analysts tracking and providing earnings estimates.

A stock with too few institutional owners may have poor liquidity and a lower-grade rating. We established a screen for stocks to have at least five institutional owners.

While some institutional sponsorship is required, too much can be a bad sign. Once everyone has jumped on the stock, it may be too late to buy into it.

A unique perspective: The Number of Shares of Issued Stock Equals

Let's take a closer look at some notable case studies that showcase the effectiveness of the CANSLIM method. Apple Inc. AAPL is often cited as a successful CANSLIM stock pick, with the company demonstrating strong earnings growth and introducing groundbreaking products like the iPod in the early 2000s.

Apple's transformative years saw substantial price appreciation for investors who identified the company as a CANSLIM candidate and held onto the stock. This is a great example of how the CANSLIM method can help investors make informed decisions and benefit from long-term growth.

Netflix Inc. NFLX is another example of a successful CANSLIM investment, with the company showing significant earnings growth and capitalizing on the shift from physical DVDs to online streaming. This led to remarkable growth for investors who recognized Netflix's potential early on and followed the CANSLIM principles.

Netflix's rise as a dominant player in the streaming industry is a testament to the power of the CANSLIM method. By identifying market leadership and growth prospects early on, investors can participate in the growth story and reap significant rewards.

Tesla Inc. TSLA has been a high-profile CANSLIM success story, with the company's innovative electric vehicles, strong revenue growth, and market leadership within the clean energy sector capturing the attention of CANSLIM investors. Those who identified Tesla's potential as a disruptive force in the automotive industry and embraced its stock early on have experienced substantial returns.

Amazon.com Inc. AMZN is often considered a prime example of a CANSLIM stock pick, with the company displaying consistent earnings growth and introducing game-changing innovations like Amazon Prime and Kindle. Investors who recognized Amazon's market leadership and growth prospects early on were rewarded with significant long-term gains.

Worth a look: Lookup Stock Symbol by Company Name

Here are some key takeaways from these case studies:

The CAN SLIM method has its advantages and disadvantages. It's a structured approach to stock picking that combines both fundamental and technical analysis, giving traders and investors a systematic and disciplined way to make decisions.

CAN SLIM's emphasis on growth stocks means it doesn't look at value stocks or dividend-paying stocks, which may not appeal to more passive investors who want a diversified portfolio.

The strategy encourages disciplined buying and selling, which helps avoid common mistakes like holding onto losing stocks or wasting time buying low-quality stocks. This is crucial for long-term success, and CAN SLIM is designed to instill this discipline.

CAN SLIM stresses the importance of market direction, advising traders to stay in cash during bear markets or corrections to protect capital until better conditions return. This is because about 75% of stocks tend to follow the general market trend.

Discover more: Ticker Symbol S

Here are some key pros and cons of the CAN SLIM method:

William O'Neil found that 95% of winning stocks had a fundamental spark to push the company ahead. This spark can be a new product or service, a new management team, or a structural change in the industry.

A catalyst like a new product or service can be a game-changer for a company's stock price. O'Neil emphasizes that investors should look for stocks with a catalyst that can propel them forward.

Investors should pursue stocks showing strong upward price movements. O'Neil notes that stocks making new highs accompanied by a big increase in volume might be prospects worth checking.

Stocks making a new high after a period of price correction and consolidation are especially interesting. This indicates a potential turnaround in the company's fortunes.

Decisive investors should have sold a stock long before it hits the new low list.

For another approach, see: Equity Market Making